Fitch joins Moody’s in warning over Hanjin’s debt

The filing for corporate rehabilitation by Hanjin Heavy Industries and Construction Co. Philippines highlights the risks to Philippine banks’ asset quality from concentrated loan portfolios, Fitch Ratings said Wednesday.

“Local banks’ loans to HHIC-Phil are equivalent to only around 0.2 percent of system loans, but some banks have more significant exposure, which could put pressure on their ratings,” Fitch said.

Fitch said some mid-sized banks in the Philippines showed higher growth appetite than the large banks in recent years, driven by their ambitions of gaining market share. 

It said the aggressive growth increased the potential for banks to take on greater exposure to more vulnerable companies, which is a risk that the credit watchdog incorporates in its Philippine bank ratings. 

“However, further large impairments could lead us to reassess banks’ risk standards and controls, which could be negative for the ratings,” Fitch said.

Fitch said larger banks also exhibited appetite for growth, but their larger capital bases, higher profitability and better access to capital and funding put them in a stronger position to withstand potential problems with large exposures. 

Moody’s Investors Service earlier said the exposures of BDO Unibank, Bank of the Philippine Islands, Land Bank of the Philippines, Metropolitan Bank & Trust Co. and Rizal Commercial Banking Corp. to shipbuilder Hanjin were “credit negative” because it would reduce their profits.

“The exposures are credit negative for the five Philippine banks because they will need to incur additional credit charges related to HHIC-Phil, which will reduce their profit,” Moody’s said.

The banks said in separate disclosures to the stock exchange Tuesday they would not be significantly affected by exposures to Hanjin.

The Bangko Sentral ng Pilipinas also said in a statement the domestic banking system remained strong and stable.   “With its robust capitalization and sufficient liquidity buffer, the Philippine banking system is therefore well-positioned to manage about $400 million in loan exposure to Hanjin Heavy Industries and Construction Philippines,” the Bangko Sentral said Wednesday.

It said the loan exposure represented only 0.24 percent of total loans of the banking system and 2.49 percent of the foreign currency loans of foreign currency deposit units. 

“Moreover, based on the results of the BSP’s stress-testing exercise, an assumed write-off of the loan exposures to Hanjin will have minimal impact on the industry’s CAR [capital adequacy ratio],” the BSP said.

The Bangko Sentral said Philippine banks implemented strategic reforms over the past 20 years that resulted in higher capitalization and stronger risk management systems to manage potential threats, it said.

Total assets of the banking system expanded 11 percent in 2018, the bulk of which were largely channeled to production loans. 

“The increase in the loan portfolio is supported by sound credit risk management consistent with the BSP’s comprehensive guidelines on CRM issued in October 2014. These guidelines set a higher standard in managing risk arising from the banks’ lending operations.,” the regulator said.

“The CRM guidelines also require banks to set aside allowance for expected credit losses, prompting them to be cognizant of potential losses in their loan portfolio even at an early stage. This has resulted in strong asset quality as indicated by the decline in banks’ non-performing loans ratio to 1.83 percent while loan loss provisioning exceeding 100 percent as of end-October 2018,” it said.

Latest data howed that the local banking industry was well-capitalized, with a capital adequacy ratio of 15.36 percent as of September 2018, above the international standard of 8 percent and the BSP’s regulatory requirement of 10 percent. 

With more than adequate capital base, the banking system continued to post strong core earnings. As of end-September 2018, the banking system’s net profit grew 5.8 percent compared to the previous year’s level. 

The industry remained liquid. Data showed that as of end-September 2018, the liquidity coverage ratio of universal and commercial banks stood at 157.6 percent on solo basis, above the current regulatory threshold of 100 percent. 

Topics: anjin Heavy Industries and Construction Co. , Fitch Ratings , Moody’s Investors Service
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